There are a number of things that need to be addressed in financial planning, including, but not limited to:
- Insurance & risk management
- Employee benefits
- Estate planning
- Retirement planning
- Portfolio allocation
Those items generally can be taken care of and forgotten about until you experience a life change of some sort (retirement or job change, marriage or divorce, new child, etc.) but there are a few maintenance items that are also important, but perhaps overlooked. It is a best practice to do these things annually. To remember, many people tie it to either their birthday, the new year, or when they file their taxes.
Credit Reports
We encourage our clients to request a copy of their credit reports for two reasons. First, many people find inaccuracies on their reports. While most of these are minor, occasionally there might be something significant enough to impair your credit. The ideal time to discover this is not when you are trying to secure a new home or job. Second, it will give you early warning of identity theft or fraud. While many people are concerned with computer hackers stealing their identity, the more mundane methods are still the most prevalent. A salesclerk stealing a credit card number or a relative stealing a check and forging the signature may not make headlines, but they are still classified as “identity theft.” Periodically checking your credit report will ensure that you quickly become aware of irregularities in your accounts.
There are a few ways to monitor and protect your credit. First, a number of services have sprung up that will notify you immediately if something looks suspicious. While these may give some peace of mind, they probably are not worth the fees for most people since you can get copies of your credit report for free and monitor it yourself. Similarly, you have no doubt seen many offers for credit protection insurance. Many people don’t realize that consumers are only liable for the first $50 of fraudulent charges on their credit (not debit) cards (more details here). Thus, if you are being charged five dollars per month for the insurance, there would have to be fraudulent charges more often than every ten months for this to make sense.
As an aside, many experts also recommend not putting outgoing mail (such as bills) containing checks in your mailbox. Criminals do sometimes steal the checks and “wash” (using chemicals) the writing (except the signature) off of the check giving them a signed blank check. It is recommended that outgoing mail with checks be placed in a mailbox that is only accessible with a key.
The easiest way to request your credit report is to go to annualcreditreport.com and follow the steps. Be aware that you will have to get the report from each of the three services separately. Also, to verify your identity, each of the services may ask you various questions (“What was your address in 1998?”, “Into which range does your current mortgage payment with ABC Bank fall?”). If you do not have internet access, you may also request the reports by calling toll-free 1-877-322-8228.
Because there are three main credit reporting agencies and you can request one free report annually some overachievers request one every four months from a different agency.
If you want more information about your credit score (as opposed to your credit report), see here.
Social Security Statements
If you are still working, it is recommended that you get a copy of your Social Security statement each year. (You may have noticed that as of 2011 you no longer automatically get these in the mail each year, but they were partially reinstated in 2014 so workers get one at ages 25, 30, 35, 40, 45, 50, 55 and 60.) By reviewing your statement you can see estimates of your disability, future retirement, and survivors benefits (it assumes your current earnings level continues, which is probably correct for most people). More importantly, since those estimates will change little from year to year, you can verify your earnings and Social Security and Medicare taxes were reported accurately. This will let you know if someone else is using your Social Security number to report wages, if your employer hasn’t forwarded on the payroll taxes that were withheld, or if there is some other snafu.
To create an account, go to, www.ssa.gov/myaccount. To verify your identity you will have to answer some questions (just like with requesting your credit report) that only you are likely to know the answer to.
Statement of Net Worth
Arguably the best single metric of financial prudence and progress is tracking change in net worth over time. If housing or investment values collapse (e.g. 2008) net worth will obviously decline, but in general, an increase in net worth year-over-year is a great measure of, as Ed Koch used to ask, “How’m I doin’?”
Net worth is simply adding up the fair market value of what you own (what everything would sell for currently) and subtracting what you owe. For example, suppose in the last year you had the following changes:
- You contributed $18,000 to your 401(k)
- The principal on your mortgage was paid down (through regular monthly payments even) by $10,000
- You sold a car you no longer needed for $20,000
- Your portfolio declined by $15,000
- Your house appreciated by $10,000
Then your change in net worth is $23,000 for the year ($18,000 + $10,000 – $15,000 + $10,000 = $23,000). The third item, the car, is irrelevant as one asset (the car) was merely swapped for another (cash) and didn’t change your net worth this year. The sale of the car may improve it in subsequent years if the $20,000 is placed in something that increases in value rather than a depreciating vehicle.
Rather than the way I did it thought, you should actually make a list of all assets and liabilities and the dollar values each year and compare them to the previous years.
Conclusion
Each year I encourage you to practice good financial hygiene by checking your credit report, obtaining your Social Security Statement, and computing your net worth and comparing it to last year.